Lehman's top trio calms jittery investors for now

GregMorcroft

NEW YORK (MarketWatch) -- Lehman Bros. Holdings Inc. trotted out its new managing triumvirate Monday to reassure investors and analysts that the sky isn't falling after the company reported a $2.8 billion quarterly loss, and their assurances that liquidity and reserves are adequate had the desired effect, lifting the troubled firm's shares as much as 9%.

CEO Dick Fuld, under pressure after Lehman
LEH
posted it first loss since going public in 1994, said the company remains committed to its business model, pointing to its capital and liquidity.

'If Fuld does step down or is axed, then the real debate can began on Lehman's survival.'
Chermaine Lee, Celent

"Our capital and liquidity positions have never been stronger. We remain dedicated to our client-driven model," Fuld said on a conference call to discuss the financial results.

Fuld also said Lehman's core strategy is sound, despite what he characterized as an "unacceptable" second-quarter loss. See full story.

Moreover, he said, the executive team -- now including newly appointed Bart McDade as chief operating officer and president as well as Ian Lowitt as chief financial officer -- will "restore" the reputation of the firm.

Lehman, hit hard by the mortgage-fueled credit crisis partly because the firm was a leading underwriter of mortgage securities, booted Joseph Gregory as COO and Erin Callan CFO last week -- the latest victims of the credit crisis swirling across Wall Street. See full story.

"Removal of the COO and CFO should be enough to reflect Lehman's commitment to change," Celent analyst Chermaine Lee said Monday.

'We're in the process of moving out of positions that we think are too concentrated and diversifying our balance sheet.'
Dick Fuld, Lehman CEO

"Regarding Fuld, as one of the few CEOs on the Street to have been spared the axe, he's been there from the beginning, brought Lehman public, so his job should be safe for now. If Fuld does step down or is axed, then the real debate can began on Lehman's survival," Lee added.

Shares of Lehman changed hands at $27.05 in afternoon action, up nearly 5%. They touched an intraday high at $28.21.

More to do

In a wide-ranging discussion on the conference call, Fuld, along with McDade and Lowitt, said Lehaman had lowered its leverage, cut exposure to mortgage securities and trimmed its overall risk exposure in the third quarter.

The executives said that Lehman's gross assets fell by $147 billion in its fiscal 2008 second quarter -- a bit higher than the amount cited last week when the company announced preliminary financial results and said it cut about $130 billion in assets.

Lehman's gross assets now total $639 billion after the deleveraging, the company said.

It said that during the quarter it cut gross leverage to 24.3 times from 31.7 times at the end of the first quarter, and reduced net leverage to 12 times from 15.4 times.

Lehman also said that during the latest quarter it reduced exposure to residential mortgages, commercial mortgages, and real-estate investments by some 20% in each asset class.

"It was a decision that the firm took," Fuld said. "We were not pushed to do this by anybody. I think we feel the appropriate leverage for us to operate is in the low single digits at the moment. We're in the process of moving out of positions that we think are too concentrated and diversifying our balance sheet.

"So I think that we feel that that's all appropriate and the right way for us to go."

Newly installed CFO Lowitt said another measure of the firm's risk -- so-called Level 3 assets, which are the most illiquid -- fell during the quarter, and added that they will continue to do so.

Specifically, Lehman's Level 3 assets fell to $40.2 billion at the end of May, and they're on track to hit a projected $38 billion at the end of the firm's fiscal third quarter, Lowitt said.

"Our deleveraging initiative this quarter meaningfully reduced our asset exposure to residential and commercial mortgages, real estate held for sale and acquisition-financed facilities and also gave us great transparency in valuing our remaining positions," Fuld said.

Lowitt also noted that Lehman's value at risk, an estimated value of the most money a firm could lose trading in any given day in the quarter, fell: May 31 value at risk was $75 million on an unweighted basis, a 16% drop from $89 million as of Feb. 29.

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